Sunday, January 27, 2013

Mervyn King’s speech in Belfast (13th Jan 2013).

I like Mervyn King because he combines two almost mutually exclusive characteristics. One is being a central banker, a job which requires conservative and measured language. The second is an awareness of radical economic ideas: ideas which he shouldn’t really back in public, but which he DOES BACK from time to time, if you read the small print. (My favourite King quote is: “Of all the many ways of organising banking, the worst is the one we have today.”)

So much for the complements. Now for a criticism.

He said in his speech that there were three factors behind Britain’s weak economic performance. As he put it, “Three factors in particular have adversely affected the pace of recovery in the UK. The first is an especially deep and protracted squeeze on the level of many people’s real take-home pay. Over the past four years, money wages have on average been rising at less than 2% a year. And higher energy and food prices, as well as tax changes and a lower exchange rate, passing through to the level of consumer prices, have all contributed to the squeeze. On average, real take-home pay is no higher than back in 2004.”

I smell a tautology: “weak economic performance” and “squeeze on take home pay” are one and the same thing – well almost. To be exact, there are several reasons why it’s possible for a country to have a “strong economic performance” while real wages remain stagnant, but none of these reasons are applicable to the UK in recent years, and/or they don’t justify the above claim by King.

Those reasons are as follows.

First, it’s possible to have a larger than normal proportion of GDP is being diverted to investment, and real resources consumed by investment are real resources not consumed by wage earners. But that’s not happening, and King doesn’t say anything about strange things happening with investment (in fact he alludes to the opposite: i.e. low investment levels).

Second, it’s possible that a particularly large proportin of GDP is diverted to exports. But that’s not happening either.

Third, it’s possible for the share of GDP taken by profits to rise, and the share taken by wages to decline. But that has not happened.

And even if it were to happen, it would not explain weak economic performance if those in receipt of profits spend the same proportion of their increased income as wage earners would have. And even if “profit receivers” DID SPEND less of their increased income than wage earners would have, that’s no earthly excuse for poor economic performance: i.e. in that situation, there’d be nothing to stop monetary or fiscal policy giving the economy some boost.

A fourth possible explanation for depressed real wages is the deterioration in the exchange rate for Sterling over the last five years or so. Now that certainly HAS HAPPENED, and King refers to it. So the only REAL EXPLANATION for King’s “weak economic performance” and depressed real wages is the exchange rate.